Our debt burden
It is a relief to hear that the Consultative Group on Indonesia (CGI) last week committed US$ 5.2 billion in new loans and grants to Indonesia for the current fiscal year. With this commitment, Indonesia is more assured of financing its development plan for the current fiscal year.
The total amount needed for the development budget is around Rp 27,4 trillion (about US$ 12.8 billion). More than one third of that amount is expected to be financed by foreign loans arranged through the World Bank-chaired CGI. Now that Indonesia has the CGI pledge, a substantial part of the financial hurdle has been overcome.
It could be said that this pledge once again shows confidence on the part of the international community as represented by CGI towards Indonesia's management of its foreign loans and economic development. The World Bank indeed has repeatedly pointed out in its yearly country report on Indonesia that the Indonesian government has been prudently managing its external debts.
In short, Indonesia has proven over the years that its creditworthiness is high. Indonesia has never reneged on the servicing of its external debts, even at times of financial crisis. In other words, Indonesia is a good place to extend a loan to.
On the other hand, a loan is a loan, which has to be repaid, principal plus interest. And for Indonesia, like for many other developing countries, the duty of servicing its external debts has been becoming increasingly burdensome. And it has become harder and harder to figure out when that burden will be lifted. Ever since 1987, the amount of money flowing out of this country to service its external public debts has been increasingly higher than the amount of new loans and grants flowing in. Since fiscal year 1987 through 1993, Indonesia has paid out not less than Rp 89.8 trillion to service its external public debts. Within the same span of time, external loans and grants to finance public projects amounted to only Rp 66.1 trillion.
In the 1987 fiscal year, the balance was around Rp 2 trillion, or 33.23 percent in favor of the creditors. Last year, the CGI creditors received around Rp 7.1 trillion net, or 74.9 percent more than they provided in new loans and grants. This year, the new commitments do not lessen the negative flow. No wonder the CGI creditors unhesitatingly support the World Bank's recommendation to continue providing Indonesia with new loans and grants. Because instead of outflow, what they will receive is a net inflow of around US$ 4 billion. Considering that, it is all the more important for us to use the foreign loans more efficiently. President Soeharto pointed out that during the past weekend when Minister Mari'e Muhammad reported the results of the two-day CGI meeting in Paris. He emphasized that the loans and grants will be used prudently for productive projects only.
Efficiency, however, is not our strong point whenever a public project is the subject of discussion. Whenever the World Bank complements the prudence of Indonesia's bureaucracy in managing its foreign debts, that praise does not cover efficiency. Instead, one of the challenges of Indonesian economic development, as pointed out in the World Bank's report, is the inefficiency of its execution. This inefficiency is indicated by the still high ICOR (incremental capital output ratio) of Indonesia's public projects. This ratio indicates the number of units of input required to increase output by one unit.
According to the World Bank's estimates, Indonesia's ICOR is relatively high at 4 - 5. In other words, to get an increase of one unit in production, Indonesia needs 4 to 5 units of input, which is higher than normal standard. From a management point of view, such a high ICOR is seen as inefficiency. In layman's words, there are too many leaks along the process of the execution of a public project. In political terms, that is often called corruption.
The burden of servicing foreign debts is already very heavy for us to bear and is becoming increasingly so. It is hard to imagine what the public reaction would be if people were to realize that a substantial part of that burden is brought about by corruption.